Key Concepts in Macroeconomics and Economic Theories

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53 Terms

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Macroeconomics

Study of the economy as a whole, including unemployment, inflation, and economic growth.

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Microeconomics

Study of individual economic units, like households and firms.

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Money supply

Total amount of money in circulation within an economy.

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Monetary policy

Central bank actions to manage the money supply and credit conditions.

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Fiscal policy

Government decisions regarding spending and taxation.

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Circular Flow Diagram

Illustrates how money, goods, and services flow between different economic sectors.

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Product market

Where goods and services are bought and sold.

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Factor market

Where resources (like labor, land, capital) are bought and sold.

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Financial sector

Institutions that facilitate the flow of funds between savers and borrowers.

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Aggregate supply

Total quantity of goods and services firms are willing to produce at different price levels.

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Short Run AS

Upward-sloping, showing that higher prices lead to more output in the short run.

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Long Run AS

Vertical, representing the economy's full potential output regardless of price level.

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General price level

Average level of prices in an economy.

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Aggregate demand

Total spending on goods and services in an economy at different price levels.

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Macroeconomic equilibrium

Where aggregate supply equals aggregate demand.

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Short run macroeconomic equilibrium

Where AS and AD intersect, but not necessarily at full employment.

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Long run macroeconomic equilibrium

Where AS, AD, and LRAS all intersect, indicating full employment.

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Recessionary gap

When equilibrium output is below full employment.

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Inflationary gap

When equilibrium output is above full employment, leading to inflation.

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Contraction

Period of declining economic activity.

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Expansion

Period of increasing economic activity.

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Trough

Lowest point of a recession.

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Peak

Highest point of an economic expansion.

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Recession

A significant decline in economic activity spread across the economy, lasting more than a few months.

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Speculation

Engaging in risky financial transactions in the hope of making a quick profit.

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Money multiplier effect

The process by which an initial deposit leads to a larger increase in the money supply.

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Bank run

When many customers withdraw money from a bank simultaneously due to fears of the bank's solvency.

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Deflation

A general decrease in the price level.

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Quantity Theory of Money

States that the price level is directly proportional to the money supply.

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Velocity (of money)

The average number of times a unit of money is spent in a given period.

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Causes of the Great Depression

Stock market crash, banking panics, monetary policy errors, international trade issues.

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What did we learn from the Depression?

Importance of government intervention, central bank's role in stabilizing the financial system, dangers of deflation.

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John Maynard Keynes and Keynesian Economics

Advocated for government intervention (fiscal policy) to stabilize the economy during recessions.

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Milton Friedman and Monetarism

Emphasized the importance of controlling the money supply (monetary policy) for economic stability.

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Subprime loan (or borrower):

A loan given to people with a bad credit history, meaning they are a higher risk to lenders.

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Mortgage-backed securities:

Investments made up of many home loans bundled together and sold to investors.

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Toxic assets:

Investments that have lost a lot of their value and are hard to sell.

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Credit default swap:

An insurance-like contract that protects a lender if a borrower fails to pay back a loan.

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Repurchase agreement (Repo):

A very short-term loan where one party sells securities and agrees to buy them back later at a slightly higher price.

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Clearing bank:

A bank that handles and settles payments between other banks.

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Systemic risk:

The danger that the failure of one major financial firm could cause the whole financial system to collapse.

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Credit freeze:

A sudden and sharp stop in lending, making it very hard for businesses and people to borrow money.

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Contagion:

When financial problems quickly spread from one part of the economy or country to another.

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TARP:

A government program where the U.S. Treasury bought troubled assets from banks to stabilize the financial system.

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Capital injection

When money is put into a company or bank to improve its financial health and stability

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Federal Funds Rate

The target interest rate for overnight lending between banks.

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Discount Rate

The interest rate at which commercial banks can borrow directly from the Fed. It is typically lower than the Federal Funds Rate and is used as a tool to regulate the money supply.

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Reserve Rate (Interest Rate on Reserve Balances)

The interest paid by the Fed on reserves held by banks.This rate serves as a tool for monetary policy and influences banks' willingness to lend.

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Capital (or reserve) requirement

The fraction of deposits banks must hold in reserve. Also helps ensure that banks maintain a level of liquidity and can meet withdrawal demands while also influencing their ability to create loans.

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Open Market Operations

The buying and selling of government securities by the Fed to control the money supply.

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Jerome Powell

Current Chair of the Federal Reserve.

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US Treasury

The executive department responsible for government revenue and public debt.

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Treasury bonds

Debt securities issued by the U.S. government.